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UNLV Theses/Dissertations/Professional Papers/Capstones


A Case study to examine the application of food

cost theories in menu pricing and cost control
management within a new restaurant operation
Mark W. Barnard
University of Nevada, Las Vegas

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Repository Citation
Barnard, Mark W., "A Case study to examine the application of food cost theories in menu pricing and cost control management within
a new restaurant operation" (2009). UNLV Theses/Dissertations/Professional Papers/Capstones. Paper 428.

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Mark W. Barnard
Bachelor of Science
University ofNevada, Las Vegas

A professional paper submitted in partial fulfillment

ofthe requirements for the

Master of Science Degree in Hotel Administration

William F. Harrah College of Hotel Administration

Graduate College
University of Nevada, Las Vegas
August 2009

Gail Sarmnons, Ph.D.

Associate Professor
Hotel Management Department
William F. Harrah College of Hotel Administration
University of Nevada, Las Vegas
Professional Paper Advisor


Table of Contents





Menu Pricing Strategies

Qualitative Pricing Strategies
Q,lantitative Pricing Strategies


Food Cost and Managerial Control

The Standardized Recipe
Recipe Cost Analysis
Utilization of Standardized Recipes and Cost Analyses


Emerging Topics








Data and Document Analysis


Current Back-of-the House Employee
Former Back-of-the-House Employee #1
Former Back-of-the-House Employee #2
Administrative/clerical Staff
Outside Accountant





Data and Document Analysis

Standardized Recipes
Menu Pricing
Recipe and Cost Analysis




Conclusions and Recommendations







APPENDIX A - Standardized Recipe Example


APPENDIX B - Cost Analysis Example




Las Vegas has emerged as one ofthe most vibrant and exciting "food capitals" of the
world, The Las Vegas Strip, a stretch of real estate a mere 1,7 miles in length, is home to
hundreds of very upscale eateries owned and operated by some of the biggest and most
prestigious names in the culinary industry, It is commendable that a majority ofthese operations
acknowledge their roles as participants in the world's largest foodservice laboratory and so freely
open their doors to the academic community ofUNLV for consultation, observation and
investigation, It truly has been a unique opportunity and privilege to study foodservice
operations within this dynamic environment and I shall always feel a debt of gratitude to each of
the many properties that welcomed me into their kitchens, dining rooms and executive offices
along the way,
It's impossible to imagine a more brilliant, talented or accomplished faculty than that
assembled in the Food and Beverage Department of the Wm, F, Harrah Hotel College at UNLV,
Without exception, these academic professionals have consistently gone beyond the call of duty
to provide an exceptional, quality education, That they have also become trusted mentors,
colleagues, and friends through Graduate school is a source of great personal pride, In this
regard, I would like to specifically acknowledge Drs, Donald and Kathy Bell, Dr, Andy
Feinstein, Dr, Pat Moreo, Dr, Jean Hertzman, and Chef Claude Lambertz,
I would like to thank Dr, John Stefanelli, former Food and Bever~ge Department Chair,
for supporting and assisting me through the undergraduate program and for encouraging me to
consider application to Graduate schooL Dr, Stefanelli was largely responsible for prompting
me to attempt teaching, an endeavor that has become one of the more rewarding experiences of
my professional career to date,

With respect to this Professional Paper, I wish to state how very fortunate I was in having
Dr. Gail Sammons agree to serve as faculty advisor. Few people, including many student
authors, realize the time and effort involved in the development, planning, .:xecution and writing
of a Professional Paper. Dr. Sammons was there each step ofthe way with invaluable guidance,


and any other assistance needed. Her commitment to and investment

in this final hurdle of my Graduate school experience will always be remembered and
Finally, thank you to the restaurant that served as the anonymous participant for this case
study. I couldn't have been made to feel a more welcome intruder and I truly appreciate the
friendliness and warmth displayed by all staff members.

Cost accounting principles regarding identification and allocation of direct raw material
costs are widely <:ndorsed as "best practices" for profit maximization throughout the food service
industry. From its potential role in establishing menu prices to the need for constant monitoring
in operations, food cost control is emphasized as a primary responsibility in managing back-ofthe-house operations (Berberoglu, 1993; Dopson, 2008).
Investigation of this topic has indicated that a large number of operators are satisfied that
their operations are supported by quality cost control procedures. Inquiry as to specific
components of any reliable cost control system often reveals inadequacies that preclude
meaningful control over food costs. These inadequacies have been echoed consistently by recent
culinary graduates in reporting observations made upon entry to the workforce. Their common
experience suggests that even the most basic components of any formal cost control system,
standardized recipes and portion cost analysis in particular, are either woefully inadequate or
nonexistent in routine management of back-of-the-house operations.
The purpose of this paper is to examine how a newly established restaurant developed
menu prices and food cost control procedures.
The first objective of this paper is to analyze the pricing methodology chosen by
management in developing the restaurant's opening menu. As will be presented, there are a
variety of recognized approaches to establishing menu prices. This analysis will identify
strengths and benefits of the standard menu engineering models employed or, alternately, permit

documentation ot~ and management's justification for, deviations from the recognized
The second objective of the paper is to assess the adequacy and effectiveness of policies
and procedures established for controlling the cost of food utilized in daily operations. "The
concept of reasonable assurance (as applied to internal control procedures) rests on the premise
that the costs of establishing control(s) ... should not exceed their expected benefit" (Weygandt,
Kieso, & Kimmel, 2008, p. 344). Accordingly, the level of control appropriate to any given
activity is ultimately a matter of management's judgment and choice. The rationale supporting
management's decisions in regard to food cost controls implemented will be an integral part of
this assessment.
While strict food cost control procedures are evident among large national and multichain foodservice operators, little is known regarding the control systems employed by small,
single-unit operations. Research ofthis topic is difficult to conduct due to the sensitive nature of
data required and an understandable reluctance by operators to divulge proprietary financial
information. Further complicating empirical research ofthe topic is the fact that "food cost
management" has become such a widely chanted mantra throughout the industry that every
operator outwardly professes to have exceptional controls in place - while secretly fearing
potential embarrassment resulting from honest reporting on specifics of individual control
system design, application, maintenance, and effectiveness.
The case study approach was selected for research ofthis topic to mitigate the negative
effect of the confounding factors discussed above. The participant's wilE..3Dess to provide
unrestricted access to confidential operating data permits independent confirmation and analysis

of cost control systems in place. The opportunity to interview and probe executive management
responsible for existing systems provides qualitative perspectives on factors important to the
decision making process in a small operation. These factors support the conclusion that a case
study approach is well-suited to research of this topic.
Finally, there is interest in measuring the impact and effect the recent downturn of the US
economy has had on a newly established, independent restaurant. Industry sales are reported as
down for 2008 by 4.4% from the previous year, with projected declines of an additional 1.2%,
adjusted for inflation, during 2009 (National Restaurant Association, 2008). How these
economic conditions have impacted the establishment's menu pricing strategy and altered
perception of cost control procedures within the organization will also be investigated.

Food products and the culinary labor associated with their fabrication for sale are
considered "prime costs" for the foodservice industry (Spears & Gregoire, 2003). These cost
components play critical roles in all recognized quantitative menu engineering (pricing)
strategies, while the concept of managing the proper utilization of food products is the essence of
food cost control. "In employing cost-control techniques and cost accounting techniques, a
manager should remember that the purpose is to find out what the costs are, whether they are out
of line (with the budget), and, ifso, where they are out ofline. Corrective action can then be
taken" (Keiser & DeMicco, 2000, p. 42).
The "corrective action" mentioned by Keiser & DeMicco may be budgetary or
operational, depending on the circumstances and particulars of the variance. Budgetary
corrective actions are appropriate when fundamental errors of fact or flaws in assumptions are
discovered to have caused unrealistic expectations for organizational performance. Operational
corrective actions are appropriate when identified behaviors or condition8 within the
organization thwart achievement of otherwise realistic performance goals established through the
budgetary process.
This budgetary vs. operational distinction is seen throughout the literature,depending on the
focus of research interest.
Menu Pricing Strategies
Qualitative Pricing Strategies

Numerous qualitative approaches to menu pricing are described in Hospitality

Management Accounting (Jagels, 2007), and recognized or referenced throughout the literature

by many others (e.g., Drysdale, 2002; Keiser & DeMicco, 2000). Common usage of such
pricing strategies throughout the industry is acknowledged by each ofthese authors and is
attributed to the fact that these methods are both easy to implement and itiiuitively understood by
all operators. These qualitative methods may be categorized as either market positioning or
trial-and-error or.ented.
Market positioning strategies establish a restaurant's menu prices based primarily on
what competitors are charging for similar products, in an effort to position the operation's
pricing below, equal to, or above the competition. The weakness in this approach is that it
ignores profitability as a consideration in the price structure, assuming that all competitors are at
least marginally profitable. These strategies further assume that product cost and quality, sales,
operating expenses, and a multitude of other potential factors are essentially the same for all
competitors in the market, which is rarely the case.
The "rule-of-thumb method" is closely related to the marketing positioning approach in
that popularly referenced industry averages (menu price or food cost percentage) are used as the
basis for establishing a restaurant's menu prices. The rationale for this method is that if such
figures contribute sufficient revenue to cover expenses and profit for other foodservice operators,
the same will hold true for any restaurant operation. Like the market positioning strategies, the
"rule-of-thumb method" fails to recognize the important operational differences from one
operator to another or the impact this uniqueness has on individual profitability of the many and
varied members within the industry. To illustrate this point, while the National Restaurant
Association and Deloitte (2006) report an industry average food and beverage cost percentage of
34% for full-service restaurants, detailed operating statistics for various segments of the industry

are reported based on medians and quartiles due to the extreme variability of data within the
reporting samples.
Trial-and-error strategies focus on the operator's perception and interpretation of market
performance and customer reaction to pricing. The "intuitive method" assumes that arbitrarily
established menu prices are correct because customers are willing to pay them. This approach is
often combined with the "trial-and-error" method, whereby initial prices are routinely adjusted
upward and downward over time, in an effort to measure both customer reaction as well as the
effect on sales and profit.
The above qualitative methods identified by Jagels (2007) were categorized as ''NoMethod Methods" by Drysdale (2002). Qualitative methods as a primary approach to menu
pricing are discouraged as unnecessarily risky in that known relationships between revenue,
expense and profit are ignored.

Quantitative Pricing Strategies.

Five dominant quantitative pricing strategies have been documented by Drysdale (2002)
as The Factor Method, The Markup on Cost Method, The Gross Markup Method, The Ratio
Method, and the Texas Restaurant Association (TRA) Method. While each strategy is somewhat
unique in its approach, aU four are based on sales and expense categories as reflected in the
Statement of Profit and Loss (Income Statement) for a foodservice operation (see Hotel
Association of New York (1996)).
Key to understanding the quantitative methods to be discussed is the definition of
"contribution margin" as the difference between sales (menu) price and dollar food cost for a
menu item. Appropriately labeled "Gross Profit" on the Income Statement, this number becomes
"contribution margin" when expressed as a percentage of sales. Miller (2003) defines

contribution margin as representing "what remains after product cost is subtracted from an item's
selling price" (p. 582). Generally, this ''what remains" dollar amount must be sufficient to cover
payroll and all other expenses of the organization, while any remaining contribution above these
expenses is recognized as profit.
Contribution margin may also be viewed from the bottom (profit) of the income
statement, and computed upward toward Gross Profit. When payroll and operating expenses
plus desired profit are known for an operation, the difference between projected revenue and the
sum of these items is what's available for allocation as food cost percentage. Both perspectives
on this concept are utilized in the various quantitative approaches to menu pricing.
The Factor and Markup on Cost Methods are very similar in approach to menu pricing
and both have a known (or desired) food cost percentage as a prerequisite for use. With the
Markup on Cost Method, the dollar cost of a menu item is divided by the known (or desired)
food cost percentage to obtain the appropriate menu price. Algebraically, Menu Price ($) = Food
Cost ($) -7 Food Cost (%). The Factor Method is the reciprocal of the Markup on Cost Method,
in that the known (or desired) food cost percentage is first divided into 1.00 (100%), with the
resulting "factor" then multiplied times the dollar food cost of the item to obtain its menu price.
Algebraically, (1.00 -7 Food Cost %) (x) Food Cost ($) = Menu Price ($).
The Texas Restaurant Association (TRA) Method is identical to the Markup On Cost
Method, except that the food cost percentage is derived by the alternate definition of contribution
margin, from the bottom of the Income Statement upward. Under the TRA Method, the sum of
non-food expenSES plus profit, as a percentage, is subtracted from sales (100%), to determine
allowable food cost percentage. Once food cost percentage is determined, the computations are
identical to those described for the Markup On Cost Method.

The Factor, Markup on Cost, and TRA Methods are widely used fr.roughout the industry
and are highly effective for established operations with a known performance history that
permits detailed analysis of operating expenses at varying levels of activity and accurate
projection of customer counts and revenue trends. For a small, independent operator and a
startup operation, sales projections are frequently little more than wishful thinking while accurate
expense histories simply do not exist. It seems plausible that many of these businesses are
attempting to employ the Factor or Markup on Cost Methods to their operations, yet must rely
upon industry averages as best available information in doing so. Under such circumstances, the
distinction between the qualitative rule-of-thumb method and the quantitative factor or markup
methods tends to blur.
The Gross Markup Method relies upon accurate customer counts and known (or
accurately projected) gross profit. Given this reliable information, it is possible to divide the
required (desired) gross profit by the total number of customers, and add this amount to the cost
of each food item in determining menu price. This approach is well suited to operations that
provide full meals to dining guests, charge accordingly, and the gross profit figure may be
allocated to the entire dining experience. Useful in institutional foodservice, buffets, and a small
number of operations that offer table d'hote and prix fixe menus, it becomes nearly impossible to
allocate a fixed per capita gross profit dollar amount over a variety of individual menu items in
situations where the guest enjoys absolute control over the components of (and revenue from) a
meal, such as a la carte dining.
The Ratio Method computes gross profit generated per dollar of food cost incurred. The
cost of food (1.00, as a percentage) is added to this result, and the total multiplied by the food
cost of each menu item to obtain menu price. This method is as effective as any of the other

methods presented, assuming the gross profit and food costs are either based on known history or
otherwise projec(ed with a high degree of accuracy.
The strength of quantitative pricing methodologies is that they incorporate proven sales
and expense relationships that determine net income for the operation. Accordingly, it is
recommended that menu pricing be derived initially through quantitative methods, with results
qualitatively evaluated within each particular market (Drysdale, 2002). This combination of
evaluative approaches will ensure that menu offerings are both profitable to the organization and
reasonably priced within the local competitive environment.
Food Cost and Managerial Control
Given the critical role ascribed to food cost in quantitative menu pricing strategies, it is
imperative that food costs be diligently monitored and maintained in operations. When variances
occur, action must be taken through management intervention. "Evaluation and intervention
may lead to improving of operational procedures, eliminating nonfunctional procedures, and
changing or eliminating goals" (Sanders & Hill, 2001, p. 15). This evaluation and intervention is
the essence of cost control for back-of-the-house operations.
Variances in food costs are generally categorized by origin as either procurement and
purchasing or fabrication and processing oriented. Procurement and purchasing variances
encompass prices paid for commodities, adherence to product specifications, efficiency of order
processing, as well as receipt and storage of food products. Fabrication and processing variances
include waste and spoilage, improper portion control, errors in production methods and
estimates, and theft (Ferguson & Selling, 1983).
Waste and spoilage are generally controlled by inventory management procedures while
theft is typically addressed procedurally through a system of internal controls that diminish

opportunities for its occurrence (Feinstein & Stefanelli, 2002). Portion control and proper
production methods are normally maintained through adoption of standard recipes and related
recipe cost analyses for each menu item (Dopson, 2008; Gisslen, 2007; Keiser, 2000; Labensky,

The Standard Recipe

The standard recipe provides a detailed listing of specific ingredient~ and their precise
quantities used to produce a predetermined quality and yield of a particular food product. The
recipe cost analysis lists quantities of food products utilized in the standard recipe with
respective costs per unit to obtain total recipe production cost and individual cost per serving.
The sum of per serving costs for all food items plated for a menu item is the theoretical food cost
utilized in menu pricing decisions. This theoretical food cost is multiplied by the number of
menu items sold, then compared to total dollar (inventory value) cost of(,,,,d sold, to determine
variances in budget vs. actual food cost for any given time period (Dopson, 2008).
Aside from their important function in establishing food cost control, the use of
standardized recipes (a) establish criteria for uniform taste and quality, (b) provide predictable
recipe yields to meet production demand, and (c) require less supervision and less trained help
(Keiser & DeMicco, 2000).
Customers have the right to expect that menu items will have the saine appearance, taSte,
smell and texture from one visit to the next. It may be argued that a restaurant's reputation and
credibility with its customers rests on the ability to consistently replicate the same (or better)
quality dining experience on each repeat visit. Standardized recipes facilitate this
accomplishment for all menu items in that they clearly specify what grade or quality of
ingredients are to be used in fabrication, establish the basic proportionality of all individual


ingredients in the fonnula, and provide precise instructions for the particular method(s) adopted
by the restaurant in preparing the menu item for service. The unique character of menu offerings
that restaurant's strive for in order to differentiate themselves from the competition demand that
standardized recipes be custom written for every operation and strictly enforced with culinary
As important as written standardized recipes are to an operation, the fact is that few
standardized recipes are ever produced precisely as written due to nonnal variations in quantity
demand from one day to the next. The standard recipe is routinely adjusted by an appropriate
conversion factor that will meet daily yield requirements, while still maintaining proportionality
of ingredients and consistency of taste, texture and appearance. Accurate estimate of yield
requirements and adherence to these estimates not only reduces waste from production of excess
product but also minimizes the potential impact of lost sales and customer disappointment due to
insufficient numbers of menu items being available for sale.
When written with detailed instructions for preparation and scaling of ingredients and
concise methods for assembly, cooking and service, standardized recipes communicate guidance
on perfonnance standards and expectations to culinary employees in perfonning routine duties
and assigrnnents. Properly constructed standardized recipes may be a grf'at aid in training of new
employees and niinimize the need for constant supervision and corrective intervention with more
tenured staff members.
There is no consensus on specific fonnat for a standardized recipe, despite wide
agreement on the infonnation they must contain. New fonnats continue to appear, especially as
kitchens continue to become more computer-friendly and software developed for culinary use


increases in popularity. A sample of a standardized recipe in one widely used format may be
viewed in Appendix A.

Recipe Cost Analysis

The purpose of recipe cost analysis is to accurately determine the price of producing a
standardized recipe as written, as well as to determine the cost per servinE; ~ f portion sizes
referenced in the standardized recipe.
A proper <:ost analysis will list all standardized recipe ingredients and the respective
quantity of each ingredient used. The unit of measure by which the product is sold and the price
per unit should be listed for each ingredient, followed by the (converted) cost per unit specified
in the standardized recipe. Whereas many ingredients suffer weight loss during preparation
and/or cooking, a column for yield percentages should be included, when applicable, to indicate
an adjustment w:tS made to pricing from as purchased (AP) to edible portion (EP) yields for these
ingredients. The final column for each ingredient will be the extended price, or total cost of the
ingredient as used in the standardized recipe. The costs of all ingredients are summed to obtain
the total cost of producing the entire standardized recipe. Computation of cost per serving is
easily performed from total recipe cost, based on the number of servings the recipe yields.
The two t}pes of product weight loss are inedible trim, as is common with peeling of
fresh fruits and vegetables, and shrinkage, caused by evaporation during the cooking process, as
is common in meat cookery. While yield/weight percentages for particular food products may be
determined in any kitchen through repetitive recipe and yield testing, there are several excellent
reference books available that provide accurate yield and weight equivalent measurements for
most common recipe ingredients. The publications relied upon for costing purposes throughout


this research are The Book of Yields (Lynch, 2008) and Chefs Book of Formulas, Yields, and
Sizes (Schmidt, 1996).

As noted with standardized recipes, there are numerous formats used for computation of
portion costs. A sample of a widely used cost analysis format may be viewed in Appendix B.

Utilization ofStandardized Recipes and Cost Analyses

Resistance to adopting standardized recipes and difficulties in maintaining recipe cost
analyses is documented throughout the literature. Keiser (2000) notes the tendency of managers ,
preference "to do those things that interest them, ignoring other equally important tasks.
Managers offoodservice operations may be fascinated by food production. But if they spend all
their time with this one function, the operation is in for a hard time" (p. 72). Levinson (1973)
mentions a position of "food and beverage controller", which assumes a large and sophisticated
organizational structure that doesn't exist for the small, independent operator. Levinson further
discusses problems associated with constant price changes of commodities and the fact that
current costs are not always readily available. Chan (1998) notes similar problems on an
international scale with ''manual recipe-cost updating was generally slow in Chinese restaurants
in clubs and hotels, with updates occurring an average ofjust every four months for clubs and six
months for hotels."

It is acknowledged that creating standardized recipes and maintaining current recipe cost
information may be considered a tedious task for many foodservice managers. Management
should be cognizant ofthis administrative burden when evaluating or designing information
systems that might facilitate and support these activities. Due to the relationship of standardized
recipes and food cost analyses to food quality, menu pricing, budgetary control and profit
management, they are functions necessary and vital to the financial success of the organization.


Emerging topics
Exploration of activity-based costing together with traditional menu engineering
techniques is currently being studied in an effort to trace operating costs to estimate menu item
contribution margins more accurately (Raab & Mayer, 2007). While an interesting concept, it
appears well beyond the reach of small independent operators and generally not applicable to
parameters ofthis case study.
There are well documented and widely accepted food cost based methods within the
literature for the establishment of menu of prices and the monitoring of actual food cost
efficiency within a foodservice operation. While potential problems and difficulties
implementing this methodology common to all operators are referenced in the literature, there is
a void in documenting the applicability, usefulness or benefit of many traditional control
procedures to the small, independent operator. As this classification of operators comprise the
majority of restaurant businesses in the foodservice industry, attempt to fill this void seems a
worthy endeavor.
This case study will examine the food cost controls deemed necessary and appropriate by
one independent operator during startup of a new restaurant operation. Motivations and
justifications for decisions and choices made will be explored in an effort to understand the
mindset and focus of an independent operator in regard to managerial control of back-of-thehouse operations. Where ever possible, conventional theory will be applied to the operation in
an effort to identify weakness in existing procedures and the potential cost and benefit of
additional controls where appropriate.


The participant for this study is an independently owned restaurant and full-service bar
operation located. in the suburbs of a mid-size metropolitan region with a population of more
than one and one-half million people. Approximately 17 miles from the city center, the
immediate vicinity is primarily residential, still under development yet destined for significant
growth over the next two years, and currently under-served by many business categories. The
property is situated in a new and predominantly vacant strip mall, including a bank, a payday
loan company, a convenience grocery store and one fast-food operator as neighboring tenants.
The restaurant has 148 seats, with a maximum capacity of 180. Decor is very modern
and minimalist, heavy on black furnishings with sleek chrome/stainless steel contrasts and
accents throughout. Large digital color monitors throughout the facility contribute to the modern
ambiance from music video displays throughout the restaurant and bar to visible point-of-sale
(POS) order screens mounted at ceiling height above the exposition style kitchen. While
appropriate to a wide variety of customers, including families, there is nco :mbtlety in the decor
being directed toward appeal to a target market that may be described as younger, sophisticated,
hip, and professionally employed.
The concept of the restaurant was heavily influenced by the emergence and popularity of
the Spanish tapas bars in many large cities throughout America. The menu is constructed to
provide a multi-course, a la carte dining experience, with each course and the total number of
courses determined by the customer(s) from a vast array of offerings. Accordingly, portions and
prices are established such that each menu item may be shared as a small appetizer by up to three
patrons in a party, or enjoyed as a more substantial component of a full meal by the individual


diner. While many classical tapas selections are featured on the menu, the restaurant prides itself
on expansion of the cuisine to include offerings more global in nature as well as many items
familiar to the traditional American dining palette - all served in the "many small bites"
presentation that defines the tapas experience.
The business is organized as a privately-held corporation, is managed and operated by the
primary shareholder who is also a professionally trained, highly creative, talented, and
experienced chef. Credentials of the managing chef include an Associate of Applied Science
degree in Culinary Arts, American Culinary Federation certification at the level of Certified
Executive Chef (CEC), and eight years' back-of-the-house management experience in fine
dining restaurant operations. Special areas of expertise for the managing chef are classical
(French) cuisine and garde manger.
The restaurant is open for operation from 4:00 pm to I :00 am daily, closed only on
Christmas Eve and Christmas Day. In addition to the managing chef/owner, the restaurant's
staffing plan calls for eleven full-time equivalent positions: bartender (1), server (4), busser (I),
cook's helper (3), dishwasher (1), administrative/clerical assistant (1). These positions are fined
with a combination of full-time and part-time employees.
Management information systems include an automated point-of-sale (paS) system for
processing of customers orders and printing of guest checks. The pas system provides full
revenue and sales information and is highly flexible in generation of reports for user defined
variables across unlimited time periods. In addition to the pas system, an independent program
is utilized for processing of cash disbursements and generation of checks. Purchasing records
are maintained on a monthly basis using Excel spreadsheets that are updated manually as orders

are placed and received. Payroll for the property is processed by an outside payroll service. No
other automated systems are used in management of the operation and heavy reliance is place on
outside accounting services for general ledger maintenance and tax reporting.
The study was undertaken at the conclusion of the first calendar year of operations
throughout winter and spring of 2009. The second full month of operations was selected for
detailed analysis, based on the assumption that standard operating procedures would be firmly in
place at that poin~ in time while serious problems with such procedures would have been
identified and corrected. Where appropriate for analysis purposes, calendar year financial
information was utilized from the working trial balance prepared by the outside accounting firm.
Investigations were comprised of both personal interview and document review.

The che!owner was eager and readily available for interview and questioning throughout
the study. Information obtained from this source was comprehensive and acquired through
approximately 48 hours of field contact from February through April of2009.
Employees were encouraged by the che!owner to participate in confidential interviews
and urged to speak candidly in response to all questions posed to them, without fear of
recrimination or retribution. Two employees from the front-of-the-house and one employee
from back-of-the-house were available and interviewed after preliminary financial analysis was
completed. In addition to the three current employees, two former back-of-the-house employees
were contacted and, upon assurance of confidentiality and consent ofthe che!owner, agreed to
meet for personal interviews. Interviews with former employees were conducted off-site at

mutually convenient times and locations. Current staff members were interviewed on-site during
regularly scheduled work hours as time permitted.
The business employs one administrative/clerical staff member who has primary
responsibility for organization, processing, filing, and retention of all original accounting source
documents. Interviews of moderate length were conducted with this staff member in order to
document the flow of the bookkeeping system, processing of bills for payment, recording of
sales and revenue information, location and production of records, and delineation of roles and
responsibilities between internal and external accounting functions.
Whereas payroll and related records were maintained by an independent outside
company, these documents were verified as complete and accepted as accurate, with no
interview or personal contact during the study. An interview was conducted with the staff
accountant of the firm that provides outside accounting services to the organization. This
interview was brief, confined to confirmation of the accounting flow established with in-house
clerical staff and confirmation of the accounting firm's scope of engagement.

Data and document analysis

Data analysis in this study was limited to serve one of two purposes. In instances where
internal analyses were available and provided, case study analysis consisted of confirming
accuracy of data utilized as well as appropriateness and consistency of methodology employed.
In instances where internal analysis was not available, appropriate analyses were constructed
with accuracy of data and appropriateness of methodology confirmed with the chef/owner and/or
clerical staff member.

Existing recipes for all menu items were reviewed in detail for accuracy in statement of
ingredients used, total yield and portion size, and conciseness of instructions/methods for
preparation/fabrication. In cases where issues surfaced with ingredient quantities or yields
provided, these matters were resolved with the chef/owner and appropriate corrections made.
Analysis of concise instruction/method for fabrication was limited to adjudication of
acceptable/unacceptable, based on the criteria of whether a line-cook of moderate (3-5 years)
experience and training might accurately produce the menu item desired from directions
In instances where no recipe existed, a list of ingredients and their respective
proportionality was prepared to allow for cost analysis. No attempt was made in either case to
improve or construct fabrication instructions as this was considered irrelevant to meaningful data
analysis and, accordingly, beyond the scope ofthe study.
Cost analyses presented by management were limited to pricing of primary recipe
ingredients only. Accordingly, full cost analyses of all recipes were constructed from available
purchasing records and confirmed with the chef/owner as reasonably accurate. Portion costs
from this analysis were utilized in evaluating menu pricing methodology as well as budgeted
food cost expense for the sample period.
Internal inventory records and computations were reviewed with i":;Jspect to beginning and
ending inventories, purchases, issues and cost of food sold. Actual cost of food sold per the
general ledger was constructed for comparison to internal computations.

Observation was a vital element of this study to pennit critical review ofpractices and
procedures at various functional levels. Prior to requesting pennission to conduct this study, the
researcher was able to observe front-of-the-house operations on three occasions as an anonymous
customer. Approximately 16 at the beginning of the study were devoted to on-property
observation, as a known observer presented to staff as a business consultant. These site visits
were no more than 3 hours in length, unannounced to staff and purposefully scheduled to capture
representative views of the operation at varying times during operating hours. Both back and
front-of-the-house operations were observed on most occasions. An additional 22 hours were
devoted to onsite observation of menu item preparation and compliance with standard recipe
specifications, review of purchasing records for costing purposes and retrieval of other
bookkeeping documents required for data analysis.
Che!owner interviews
Beyond details specific to the operation discussed in other areas ofthis analysis, much of
the time spent interviewing the che!owner was devoted to gaining an understanding ofthe
motivation(s) for opening the business, goals for the operation, and the parameters established
for defining success.
Q: You've been in the business long enough to know all that running a restaurant entails.
What prompted you to open your own restaurant?

A: I wanted to get back into food again. Without really noticing it, I had moved further
and further away from the creative aspects of culinary that made me choose a career as chef and
into the role of management. I wasn't happy doing that ... continually dealing with
administrative issues that had nothing to do with what was on the customer's plate and only
peripherally related to the guests' dining experience. Not that I wasn't good at what I did; it was
just time to make some changes, get back to basics and focus on somethinl! that actually made
me feel good about myself at the end of the day.
Q: That'& an interesting response but I'm not sure it answers the question of why you
chose to open your own restaurant. Certainly you could have found a position as chef working in
food production rather than administration?
A: Ok, it was the process that I really couldn't handle. When you're cranking 150
covers at lunch and 250 for dinner there's a goal to get everything working smoothly and then
just keeping it that way. Everyone is afraid of menu changes... afraid of how customers might
react, afraid of the costs and the hassle of changing ingredients on hand... afraid of moving
away from anything that seems to be working well. But it's a grind for anyone who enjoys
cooking and creativity... and it's all numbers driven.

Q: Are you telling me that your operation won't be "numbers driven"?

A: Never to the extent that the big guys are. Hell, you're the first accounting type to set
foot in my kitchen and that's only because I trust you as a chef... I know you can relate to what
I'm saying. And I really believe that a small restaurant can succeed by focusing more on what's
on the plate than what's on the P&L.
Q: Do you have a profit target in mind for the restaurant?

A: Yes, and it's very realistic. If! can make the same salary I'd earn working for
someone else, yet have the freedom to run and manage things my own way, I'll be happy.
Anything above that will be icing on the cake. I'm not about squeezing every last nickel from
every menu item to make another dollar off every twenty customers. That wears you out doing it
and it eventually shows in the food you serve.
Q: You obviously have a considerable sum at risk with this facility. Have you thought
about return on investment?

A: Yes, there's about $400,000 on the line just to open the doors; almost $100,000 more
than I'd anticipated. Forty percent of that is mine, the rest was borrowed.
Q: What was the source of borrowed funds? And what's the payback?
A: The landlord was willing to finance most ofthe TI (tenant improvements) and roll
them into the ten year lease. Some financing was available on the new equipment purchased,
mostly three and five year lease payments where I own the equipment at the end ofthe lease.

Q: What made you choose this location?

A: I liked the fact that this whole area is new... new part oftOWJl new housing, new
strip mall, etc. It) an upscale area, full of optimism and everyone seems focused on building a
sense of community here. The landlord was actively seeking a restaurant as part of the tenant
mix and was flexible on the TI financing as an incentive to sign. I looked at existing properties
available for lease but they all had drawbacks for what I wanted to do and how I wanted things
laid out for back-of-the-house. I had an architect look at one place (existing restaurant) versus


what I ended up with here... it was a (dollar) wash between the cost of remodeling there and the
cost of building out to my specs here.
Q: You mentioned being $100,000 over budget? How did that happen?
A: Ha! The lease was signed eight months before the building was scheduled for
completion. Construction went pretty much as planned but by the time I was ready to start build
out there were licensing problems with the city. They approved development around the strip
mall that had my operation, with a liquor license and bar, in violation of ordinances on distance
requirements for sale of alcohol. We wasted two months with the landlord trying to fight city
hall but finally decided the best approach was to move my location to the opposite end of the
mall. Of course that meant an entire different floor plan and layout, which required major
reworking of (building) plans. This cost me an additional $20,000 in architectural fees, plus
almost $50 thousand for plumbing and electrical work in the new location.
Q: So technically, you were only $30,000 off in your initial capital projections?
A: Yes; pretty good, huh? The rest was kind of spent on unplanned upgrades to
equipment that I could have done without but are really nice to have.
Q: You've been open almost one year now. What has been the biggest surprise running
this place?
A: In a word: employees! It's a small staff, but turnover has been almost 700%. And
three of my people have been with me since we opened, so that kind of tells you how fast some
of these position turn. Its mind boggling how difficult it is to hire qualified people and keep
them, on both sides ofthe house.


Q: Has this impacted customer service?

A: Well, we've had some very bad nights, ifthat's what you're asking. Several times
I've been forced to remove my chefs hat and pitch in as a server out front; occasionally trying to
work both sides of the house at the same time. There've also been night~ "'hen washing dishes
has been assigne<l to anyone and everyone who has a free moment or spare hand.
Q: What js your work schedule like compared to your last job in industry?
A: No comparison. I'm working twice as many hours and twice as hard. I was used to
l2-hour days, 6-days per week. Here it's 24/7 a lot of times. It wears you down a bit; but I
expected some of that, especially during the first year. And the hours are worth it, most of the
time. I never feel sorry for myself or miss having a personal life; I really love doing what I'm
Q: Where is your turnover highest? Why do you think this is so?
A: Definitely back-of-the-house is highest. I'm not paying a whole lot and rely on entrylevel people out of necessity. So, of those who have left kitchen positions, about half have been
no real loss; they weren't cut out for this kind of work in the first place. The other half have left
for a thousand different reasons. The best people tend to move on to better opportunities as they
become available and I do my best to train what's left to help me out where ever possible in the
kitchen. I prefer to do most ofthe prep and cooking myself, so the main focus is on having help
on the line during peak hours.

Q: Any other surprises back in the beginning?

A: I was all wet in my original revenue projections. In a good way, fortunately.

Q: Howso?
A: If anything, I wanted to be ultra-conservative in budgeting revenue. To break even, I
figured I had to average about $60,000 a month in sales. I used a 65% average tum-rate - that's
a full 20 points below what the most successful places I've worked have done - and figured I'd
serve around 100 covers a day once things got moving. That gave me an average check of about
$20, which felt reasonable. Being in a residential neighborhood, I expected an 80/20 (%) split
between food and beverage.

Q: So where were the surprises?

A: From the day we opened, I exceeded the average check projections. We're actually
doing around $29 (average check) and that's held pretty steady throughout. I really didn't set out
to make a lot ofrnoney from the bar. I mean, I don't want people thinking of my restaurant as a
"comer bar" type of operation. But liquor sales are a lot higher than expected; about 1/3 of total

Q: How did you go about setting menu prices before you opened?
A: I wanted a food cost of26.5%, so I just multiplied everything by 4.

Q: "By 4" would give you a food cost percent of 25%, ifI'm not mistaken...
A: Well, yes, but 4 is an easier number to work with.

Q: How did you determine that 26.5% was a good number?

A: It's what we used at (former employer name deleted for confidentiality).
Q: You just took someone else's food cost percent and used it as your own?

A: Yes; it seemed to work well for them. You think that's wrong?

Q: I didn't say that. .. The method you describe, multiplying dollar cost of food by a
mark-up factor, is fairly common. Using another property's food cost perventage is something
I've never seen recommended, however. And 26.5% is a bit below the industry average, I
believe. You've .:lever had customers complain about prices?
A: Never. And if you think the 26.5% is low, I actually rounded up from there in setting

menu prices.
Q: The mark-up factor was just one step of the process?
A: Yes, I kind of used that as the minimum I had to charge to offer an item on the menu.
From there, I rounded to the nearest quarter or fifty cents in most cases. Some things were just
marked to the nearest price point if their food cost was really low. A couple items had to be
priced lower if I wanted them to move on the menu. I kind of used my best judgment, I guess.

Q: Nothing wrong with that. .. But you are telling me that a written cost analysis of
some sort exist for every menu item?

Wen, not if you mean for every ingredient. ..

Q: I don't mind dried herbs and spices being omitted, but everything else was costed?
A: No, only the cost of the major ingredient was used.
Q: Let me be sure I understand... The highest cost item in a recipe was used as the base
to which the mark-up factor was applied?


A: Right. The cost of all other ingredients will be less than 20% of that amount, ifit's a
good recipe. Didn't Chef (mutual acquaintance name deleted for confidentiality) teach you that?
Q: I can't say that he did. You do realize that if your 20% figure is accurate, this
probably raised your actual projected food cost percentage by around 5%, which places you
more in line with industry averages?
A: Well, yes; if you want to look at it that way. So you're saying Chef was correct with
his method? We're both ending up in the same place, just my way is easier?
Q: I think we'll have to confirm that to be certain. Tell me about your standardized
A: I won't lie to you so will admit I had to write a couple ofthem down when you told
me you wanted to review all ofthem. But most everything on the menu did have a written recipe
from before we opened. And I organized them for you to take a look at when you're ready.
Q: Whatis your actual food cost currently running?
A: It's somewhere between 34% and 36%, which is about where I expected it would
work out to be.
Q: Where are the biggest problems with food cost?
A: Definitely produce. Produce is a nightmare in this town. First, I'm a smaller account
so there's not a huge interest in my business. I've tried every distributor in town and they all
have their problems. But I can tell you, I throw out nearly as much (produce) as I use due to
spoilage. And it's a continual balancing act between over-ordering to meet minimum order
requirements for free delivery (I need at least twice a week delivery for freshness) or shopping at

the local grocery stores. I prefer to shop the grocery stores, actually, but they don't always have
what I need and I can waste 2 hours out of my day with just shopping.
Q: So you're satisfied most ofthe cost overages are due to spoilage, and not waste in
A: Seriously, there's no problem with production waste. I'm very frugal that way, to a
point that I make a game out of it in the kitchen. I spent a lot oftime on the menu to be sure I
had plenty of items that made use of product that would otherwise hit the garbage. We cover
almost all the bases between soups, sauces, and ground meat (charcuterie) items on the menu.
And every employee knows that I keep a tight eye on the garbage cans in the kitchen.
Server interviews
Q: How long have you been working here?
Al & A2: Since we opened.
Q: You must like it here, then, I'll assume?
Al &A2: Very much.
Q: What makes it a good place to work?
AI: Chef is great and the food is awesome... we serve some incredible food here that
always rocks with the customers.
A2: I like the customers... mostly regular people from the neighborhood, nice people
who treat us well.


Q: What do you think customers like most about coming here?

Al & A2: Definitely the food. It's always the food. Every dish looks like a work of art
made especially for them... they always "oooh!" and "ahh!" over the presentation. A lot of
places don't think it's so important, but customers really do notice and appreciate that.
Q: How about customer complaints? Things they don't like?

AI: I'd probably have to say the plate portioning is the biggest issue I hear when
customers seem unhappy about anything. They don't like the 3-serving portions that we offer;
it's too much for a lot of2-tops and 2 orders (six servings) is too much for a lot of 4-tops. And,
of course, most of our parties are either 2- or 4-tops, so we hear that a lot. Chef says you have to
plate an odd number of items for things to look right, but I'm not so sure.
A2: She's right about the 3 servings thing; I hear that a lot. Slow service can also be a
problem, though. A lot oftimes things back up so far in the kitchen that ''''j just can't get orders
out to customers and they grow impatient. Chefs aware of the problem more than anyone, but
help is so hard to find for back there.
Al & A2: We "86" (selVrun out of) a lot on menu items, especially the unique things
that a lot of customers like to order. If we know they're popular, why don't we make sure to
have them available? It's not a big thing with customers because there is so much to choose
from on the menu, but they're always disappointed when we have to tell them things aren't
available. This happens with a couple of items all the time. Maybe you could help us convince
Chefthis should change?

Q: I understand there's a lot of turnover in front-of-the-house, too. Why do you think
that is?
AI & A2: It's high, yes; but I'm not sure it's any worse than other places I've worked.
A lot ofthe servers we hire are working because they need quick cash and a temporary job.
They never tell you that during the interview, but it's definitely out there. Once they make
enough for whatever they were working for, they're gone. I think we see a lot of people who are
in between "regular" jobs; some just working temporarily to augment family income. Those
types are always out there.
This really isn't a "tits and ass" kind of place. I mean, our customers don't respond to
that and as soon as a lot of the younger servers realize this, they're offto somewhere else. We
seem to see a lot of those. And you go ahead and hire them when you need help, knowing things
probably aren't going to work out long-term.

Q: You do alright with salary and tips?

AI and A2: (Enthusiastic) Yes! It's minimum wage, but the tips are pretty good...
steady... it's a nice little place, in that respect. Not as good since the economy turned
(downward), but our (average guest) checks are holding and customers still tip fairly well. I (we)
just wish there were a few more of them these days, that's all (nervous laugh).

Current back-of-house employee

Q: How iong have you been working here?

A: About six weeks ... I'm doing an internship for (local culinary school name omitted
for confidentiality).

Q: Good for you. . . Are you learning a lot?
A: So far, yes. But I've never worked in a restaurant before, so everything is kind of
new and something to learn about.
Q: What kinds ofthings do you do in your position?
A: Lots of prep work; slice and dice stuff - mise en place, mostly. I also do most of the
portioning and wrapping for storage on things made ahead. I also keep the refrigerators
organized and clean.

Q: What do you like most about working here?

A: Really, I'm satisfying school requirements, learning about kitchen operations, and
getting paid for it - all of that is cool. I also like watching Chef work; I've learned a lot from
just watching. I rt.lally like the line, when Chef has to put me to work cooking for a change.

Q: What don't you like about working here?

A: It's mostly disorganized and I never know what I'll be doing from one day to the
next. I also don't get to do a lot of cooking because Chef wants to do all of that. Don't get me
wrong, I like doing mise, it's just that I thought I'd be getting more cooking experience.

Q: SO yoh usually come into work, grab the prep list, and start out with that until service
A: Well, there's not really a prep list. .. Chef always tells me what needs done and I sort
ofjust do that every day.

Q: I understand there's an issue with menu items being "86'd" on a regular basis. What
is your read on that?
A: It happens all the time with (the two highly popular items). There's no story about it
other than Chef doesn't see it as a problem I'm pretty sure I could prepare both items myself if I
was put in charge of them, and we'd never run out. I mean, both items are completely prepped in
advance and frozen - there's no reason not to always have them available.
Q: Do you see yourself continuing to work here after your internship is finished?
A: Maybe, if Chef will have me. But I also think I need to look around at what's out
there, too; probably work through the placement office at our school. Do you know of any good
Former back-of-the-house employee #1:
Q: How long did you work for Chef?
A: About two months the first time. I was in between jobs and Cheftook me on to help
me out with the bills. I worked on-call for a few months afterward but it got so I was unavailable
most ofthe time.
Q: So it was understood that your employment was temporary from the start? Any
particular reason you weren't looking to stay longer term?
A: Chef couldn't afford me as a permanent thing and, like I said, I was between jobs
waiting for something to open up.

Q: What was it like working here?


A: Crazy. Disorganized. You do know Chef is a control freak? Can't delegate and is
never happy with what anyone else does, work wise. We got along better than most but only
because we're kind of from the same school on things. Still, it was tough at times.
Q: Try to expand on what you mean by "disorganized"?
A: I've n~ver worked anywhere where there wasn't some sort of routine in the back;
certain things done on certain days ofthe week, some things done at the same time every day,
that kind of thing. That never existed with Chef. Each day would start with a meeting where
we'd go over a written list of things thought about overnight. We'd walk through the refrigerator
and take stock of everything already prepped and on-hand. From there, Chef would decide what
needed prepped and ready for service that night. Next day would be the same thing over againall by the seat of the pants.
Q: What did you like most about working here?
A: Top notch ingredients for everything and the pride in presentation were the best parts.
I mean, you don't find a lot of places that care this much about the food anymore.
Q: And the worst part?
A: The disorganization. Not knowing what I was responsible for yet somehow feeling to
blame when things that I had no control over didn't go well. That was really frustrating for me;
I'm used to a kitchen working as a team and that atmosphere didn't seem to exist.
Q: Did you find the standardized recipes useful?
A: Some were pretty good; some you couldn't follow without watching Chef prepare it a
couple oftimes. I made a lot of my own notes to help me out.


Q: The difficulties with written recipes were all procedural? No problems with
A: No, the ingredients were all there. The directions were often lacking, or nonexistentor Chef had changed things since the recipe was written but the change didn't make it into the
Q: Would you characterize cost control procedures as being adequate?
A: It was pretty good, actually - but not a big deal. A lot of thought went into the menu,
especially including recipes that cross use ingredients. Trim always seemed to have a use
somewhere - Chef is really good at things like that, especially on the high cost product. It didn't
seem to be the issue it is in most kitchens, probably because there were only two of us, and we
both knew what we were doing, most ofthe time.
Former back-of-the-house employee #2
Q: How long did you work for Chef?

A: Six weeks.
Q: What was it like working here?
A: Not the best job I've ever had, but it was ok. I like working the line, so things didn't
work out so well in that regard.

Q: You mean you never were assigned to work on the line?

A: Oh, I was there every night. Ijust couldn't do much when Chef was able to keep up
(with dining room demand). And then we'd get busy, Chef would be in the weeds, and it would


be like, "here do this; hurry up and do that". I never knew what was coming at me. Then Chef
tells me I'm not catching on quick enough and things aren't working out.
Q: Weren't the standard recipes any help to you in learning your job?
A: What recipes? I never saw any...
Q: Did you ever ask about recipes?
A: Sure - a couple of times. Chefjust told me to do what I was told, that I shouldn't be
wasting time reading recipes.
Q: What is your background?
A: I worl:ed two years as cook for a coffee shop... no upscale or fine dining experience
but a varied menu 24-hours a day. I also worked fast food during high school.
Q: What did you like most about working here?
A: Not much, really. I mean, you want an honest answer, right? The day Chef fired me
was probably the best day I ever had.
Q: What"are you doing now?
A: I'm room service chef over at (major hotel property name omitted for confidentiality

Q: How long have you been there?

A: Six months, and I really like it.

Administ:ative/clerical staff interview
Q: How long have you been working here?
A: Off and on since it opened.
Q: "Off and on"; what does that mean?
A: Well, I quit a couple of times.
Q: I see. May I ask what caused you to quit?
A: Let's say there was a misunderstanding of what the job was in the beginning. I was
hired as a bookkeeper but did nothing but clerical and runner type work during the two weeks
before opening. After we opened, it was like the bookkeeping was secondary to everything else,
and I thought I would be doing bookkeeping only.
Q: Is bookkeeping a really a full-time position here?
A: No. And that's what we had to iron out during the two times that I quit. I'm now just
part-time and hourly. It's been working fairly well for a while now. But it took a long time to
get everybody trained and in agreement on what my responsibilities were.
Q: What exactly do you do here? What are your responsibilities?
A: I do the banking, which is probably the most important, along with reconciliation of
the cash register/POS reports to the bank deposits. We do a lot of credit cards, and that is always
a challenge. I also input payroll for the service bureau every week and pay bills.

Q: Any problems with any of those activities?

A: Always. Administration and paper work aren't Chefs strong suits, if you know what
I mean. Payroll is always a challenge getting in on time and making sure everyone gets paid.
Time cards are an on-going issue and Chef has a tendency to hire or call part-timers without
telling me.
Did Chef mention to you about the POS system and cash drawer? That continues to be a
problem. We pay for stuff out of the cash drawer all the time, but receipts don't always get
submitted. That has me running around, and Cheftrying to remember, every time the cash is
short. We also have a problem with comps getting rung up as sales and voids are always a
Q: Is thir. a problem with the POS system?
A: At first we thought so, but it tumed out the problem was with us not using it correctly.
Servers don't understand how the system works a lot of times and even our regulars have trouble
remembering. We issue a lot of handwritten checks to customers, which are a real pain.
Q: Are you telling me the POS reports I've been using aren't a good source of
information for s,ales?
A: No. Well, maybe during the first month (of operations). It (the POS system) was
pretty useless then and I didn't know how to post adjustments to reflect corrections. It's working
now, but I get frustrated because it wastes a lot of my time going back and correcting entries all
the time. Reconciling the bank to the sales reports is the most time consuming job I do.
Q: Are you the only one who knows how to do this? I mean, does Chef understand the
(POS) system so that entries can be made when you aren't here?

A: No, not at all. He thinks he does, and that was one of the reasons I quit the second
time. Chef would try to fix things after closing each night, which gave me two messes to figure
out the next day. But you're correct that I'm the only one who knows how to make corrections,
or understands how the system really works.
Q: You're making me nervous relying on just POS reports for data. Should Ibe?
A: No, I really don't think so. We had a big meeting with the (outside) accountant the
second time I quit. Chef expected them to "find someone" to replace me and the accountant
understood what was going on after talking with me. The accountant backed me and made Chef
understand how important all ofthis was to the big picture - I mean the accounting records and
the IRS. That always gets their attention, when the IRS having a problem with something enters
the picture. And, of course, the accountants knew no one was going to stay in my job without a
better understanding of what the job was responsible for doing.
So, the first month - it was really only three weeks we were open - I wouldn't trust the
detail from the POS system. Total sales were kind of "plugged" from bank deposits then
because everything was such a mess. But from then on, I went back and posted all of the "hand
tickets" and "voids", and balanced the system so it would be correct. You can talk to the
accountant about this, but it hasn't been an issue for a long time now. Still a problem, but not an
issue - that's a good way to put it.
Q: What information or documents do you provide to the accountant?
A: Every month I package all of the daily bank deposit information, copies of checks,
and all ofthe payroll reports. These go to the account's office for them to code and post to the


general ledger. They take care of the bank reconciliation, sales tax reporting and printing a trial
balance each quarter.
Q: How often do they provide financial statements?
A: You'd have to ask them, or Chef, that question. I've never seen aP&L (Statement of
Profit and Loss)...
Q: How big of a problem is cash flow in doing your job?
A: Not at all, really. There's always money in the bank to pay the bills. Chef hasn't
been making transfers into the savings account as often since August, but I never have to worry
about not being able to mail checks when I pay bills.
Q: Do you enjoy your job here?
A: Actually, I do. It was kind of hard for Chef to trust handing everything over to me in
the beginning, and I think I read that as not trusting me, personally. Now, everyone values what
I do and I definitely feel needed. And it's a great part-time job that allows me to work
independently, so long as I get the work done on time. There are times, I think, when Chef still
wishes I were a "girl Friday", but it was silly using me for that at my hourly rate.
Outside accountant interview
Q: What is the scope of your engagement with the restaurant/corporation?
A: It's limited service. We review all bank transactions, reconcile the bank, and
maintain the general ledger. Entries are posted monthly and we're retained to prepare all nonpayroll tax returns.

Q: What about financial statement preparation?
A: We can certainly provide that, but the client didn't want to pay for financial
statements on a routine basis.
Q: So Chef is relying on a cash-basis trial balance to determine profit each month?
A: Obviously we can't speak to what Chef may do with information provided by us, but
it's reasonable to assume that's what is being done. We normally provide copies of the trial
balance on a quarterly basis, however; not monthly.
Q: I've had some interesting conversations with the bookkeeper. Can you shed any light
on the difficulties encountered there, at least initially?

A: Certainly. There was no understanding of what the bookkeeping and accounting role
entailed. Expectations were unrealistic in terms of the time requirement for the basic
bookkeeping functions and Chef seemed to think the bookkeeper was more of a secretary and
personal assistant.

I sense there was an adversarial role with accountants in the past, from Chefs industry
experience with internal accounting staff. There was learning curve to establish that we're really
here to help with the record keeping and tax compliance side ofthe business. I'm not certain that
point is still fully understood or that Chef knows how to use the information we provide. While
other services were certainly offered, there was a reluctance to engage for anything more than
basic tax services. That is fine with us; we have a large number of clients who are content
operating that way. And we're always here to provide any additional services as they are

Data and document analysis
Standardized recipes
Standardized recipes were provided for all menu items. Many of the recipes were in
handwritten form but all seemed reasonable as to ingredients, quantities used and proportionality,
and portion yields. Preparation and fabrication was observed for approximately 25% of menu
items and no material deviations from standardized recipes were noted in practice.
The weakness of existing standardized recipes was in the instructions/methods provided.
In the case of handwritten recipes, instructions were frequently little more man the chefs
shorthand or cryptic notations. In several instances, even the chef had to read the entire set of
instructions, thiIi" for a moment, and then verbally translate what the notations meant. Where
recipes were typed, instructions were improved, but often vague and frequent confusion was
encountered relating specific lines of instructions and the ingredients to which they related
within the body of the recipe. Overall, recipes were judged to be beneficial for cost analysis, but

seriously deficient for purposes oftraining new employees and only marginally useful in
providing detaile.d guidance to existing staff.
Menu Pricing
The approach described by the chefi'owner for establishing initial menu prices was a
combination of quantitative (Factor Method) and qualitative (Intuitive Method) approaches.
With a stated desired food cost percentage of26.5, a mark-up factor of 4 was used to determine
minimum menu price for each item. In departure from accepted application of this method, the
mark-up factor was applied only to the most expensive or major food item of each recipe.

Projected food cost for the sample month, utilizing fully priced cost analyses for all menu
items, was 31.26%. Due to the rounding to nearest menu price points and intuitive adjustments
to market used in establishing actual menu prices, there was no significant difference in final
menu prices adopted whether using the partial or full recipe costing approaches. It must be noted
that this was coincidental and primarily due to the conservatively low food cost percentage
arbitrarily used in computing initial menu prices.
Recipe and cost analysis
The projected theoretical standard food cost (weighted-average) frc,m the internal sales
mix reflected an expected food cost of25.5% ($ 16,546) for the sample month. The projected
standard food cost using fully costed recipes was 31.2% ($ 20,245). Computation of cost of food
sold from internal purchasing summaries resulted in $23,100 (35.6% of sales) for the sample
month. Similar computation based upon account totals from the general ledger was $ 25,436
(39.2% of sales).
The difference between the internal computation of cost of food sold and that computed
per the general ledger is due to several factors. Purchase records are maintained independently
from the general ledger and are based primarily on receiving documents and/or subsequent
invoices from vendors. During the sample month, approximately $1,400 in purchases made in
cash and reimbursed to employees through daily receipts were not recorded in the purchasing
records. One produce and one meat invoice with a combined total of $93fi were not entered into
the purchasing rec;ords, accounting for the remainder of variance between purchasing records and
the general ledger.


In operational monitoring of food costs, it has been noted that acceptable variances are
determined by management and that variances above (or below) these established tolerable limits
warrant investigation. Whereas variances are monitored in percentage changes from one month
to the next, that variances were computed from an incorrect projected food cost base did not
preclude accurate analysis of percentage increases or decreases on a monthly basis.

A consistent observation in all visits to the property was how totally dependent the
operation was on the chef/owner. Employees seemed intimidated to show initiative in the
discharge of duties and the general atmosphere was similar to that with young children
continually seeking guidance and approval from a parent. Furthermore, this appeared to be a
climate encourage by the chef and quickly adapted to by all employees.
The chef/owner is a very disciplined, organized, and detail-oriented individual who
always seemed to have a plan that governed daily activities throughout the restaurant. This plan
was rarely articulated to employees, leaving them with minimal senses of direction or
satisfaction in accomplishments as daily tasks were performed. This observation was best
expressed by a former employee in referring to a lack ofteamwork in the back-of-the-house.
In conversations with the chef/owner and through review of volumes of managerial
documents and reports, a tendency to confuse data with usable information was observed.
Nowhere was this more pronounced than with utilization of the POS system and the various
reports it is capable of producing. As one example, detailed print-outs of daily sales and number
of items sold, by menu item, are routinely generated and saved in binders in the administrative
office. This information has not been analyzed to the point where the number of each menu item

sold per week is known - or utilized to maximize efficiency in scheduling kitchen production.
Similar information might be used to improve accuracy of food order quantities, potentially
minimizing spoilage.
Observation of food production indicated that recipes were adhered to as written.
Ingredients were properly scaled and all usable trim and scrap was routinely captured for future
use in other recipes. Considerable time appeared to be wasted in working one recipe at a time
when an organized preparation list may have facilitated preparation of in:;rf;dients for multiple
recipes all at onc~. Additional staff time was wasted looking for the chef70wner upon
completion of each task as further direction was required for the next activity.
Numerous instances were observed where production on the line was compromised
during service by removal of one or more cooks to prepare items that should have been
fabricated earlier in the day and ready for appropriate finishing procedures upon receipt of the
order. On busy nights, where such delay could not be tolerated, servers were instructed to
advise the customer that the menu item was unavailable.
Service, in general, is slow. Part of this seems inherent to the relaxed pace of the
restaurant as well as the concept ofthe multi-course, many-small-bites dining experience.
Customers seem to understand the pace and few instances of intolerance were observed. That

and absence of a
said, much of the delay in service is through lack of organization in the k;':hen
full-time expeditor managing the flow of orders prepared and released to servers.


Conclusions and Recommendations

This case examined the application of cost control concepts within the framework of a
small, independent restaurant operation. While it was demonstrated that these concepts are
applicable to the small, independent environment, the study also suggests that the need for many
of the more elaborate cost control systems is diminished through tight, centralized control over
operations. There is a degree of validity to the assertion that when management consists of a
sole individual who is !llways present and continuously monitoring the operation, volumes of
written policies and procedures relating to cost control become bureaucratic and redundant.
The weakness ofthe above conclusion is rooted in a narrow perspective ofthe cost
control function as single-purpose financial analysis tool rather than as an integral and valuable
component of a comprehensive management system. Few would argue against the important
role afforded the subject of cost control in maintaining or maximizing prufitability of an
organization. In this study, however, it was evident how components of a quality cost control
system may benefit many areas of the operation beyond mere financial analysis.
This case presented the chef/owner working 16 - 20 hour days, seven days per week.
This concept of a sole individual always present and continuously monitoring the operation is
unsustainable in the long run, dangerously risky, and poses serious threat to both continuity and
viability of the business. The level of control (and responsibility) currently assumed by the
chef/owner is such that continued operations would be impossible in the event ofiliness, injury
or death. The concept of a management structure assumes multiple tiers of defined and
integrated positions, coordinating activities and responsibilities in a harmonious and

complimentary manner to achieve smooth operation of the business. In this situation, there are
no tiers and, as a result, there is no structural strength to management ofthe organization.
In addition to the traditional role played in the cost control system, it appears that

standardized recipes may serve an important function in the employee training process as well.
Back-of-the-house employees consistently expressed frustration with disorganization, confusion
as to what was expected of them, and the absence of clear, routine assigmuents and
responsibilities. The chef/owner was unsatisfied with the performance of hired staff and
disappointed in employee turnover. It is possible that these two complaints are related and that a
clear, concise set of carefully constructed standardized recipes might ameliorate the discontent of
both parties if incorporated as a component of the back-of-the-house employee training process.
Analysis of menu items sold is an important step in determining the theoretical budgeted
(expected) food cost for a given volume and mix of sales. A preliminary step in conducting this
analysis is capture of sales data per menu item, information routinely maintained by virtually all

pas systems.

Beyond its value to analysis of historical costs, this data on menu items sold may

be utilized as a valid predictor of future sales. While the statistical proof of this predictability
(probability) is likely "too much information" for many small owner/operators, it is intuitive that
sales for each menu item should eventually reach a "normal average" in J11Jmber per day, week,
and/or month. While variability will always be an issue with such predictions, these averages are
generally within tolerable limits and quite reliable for purposes of food production and planning.
Once the average number of each menu item sold is established, it is a relatively simple
matter to compute total number of each item required for sale, total ingredients required for
preparation, and production assignments for staff to meet these requirements. Use of this

information would permit more accurate ordering of food products and streamline the purchasing
function as a whole. Especially for a menu that lends itselfto advance preparation and storage
of menu items, it would also allow establishment of daily "par" levels of prepared product ready
for sale. Daily inventory of items on-hand versus expected sales would serve as a basis for
special production assignments and minimize instances of menu items being unavailable to
customers. More important, production schedules based on accurately projected sales would
improve utilization oflabar and address the general complaint of "disorganization" reported by
all back-of-the-house employees.

Menu prices were determined to be valid, even though developed by unorthodox

application of acknowledged menu engineering techniques. Full cost information for all menu
items was provided in connection with the study and it is strongly recommended that such
information be maintained current, on at least a quarterly basis, for all present and future menu
items offered. Additionally, future menu pricing decisions should be based upon accepted
quantitative and qualitative approaches utilizing total recipe costs.
Standardized recipes were reviewed and critiqued in considerable detail in connection
with this study. Effort should be made to clarify and refine the instruction/methods section of
these recipes and enter them in typed formats. Complete, printed recipes for every menu item
should be provided to new kitchen employees as part of their initial training and should be
available to all back-of-the-house staff for reference at any time. Whereas a digital camera and
computer equipment is readily available, consideration should also be given to incorporating a
photograph ofthe finished plating concept for each dish within the standardized recipe.

There is no argument that the devotion and commitment ofthe chef/owner played a
significant role in successfully establishing the restaurant and its reputation with customers.
After a year in business, however, the organization continues to exude auras of tentativeness,
uncertainty, and unconfident control expected of a newer, fledging operation. This is due, in
large part, to micro-management of operational details and limited focus on developing a trained
and competent staff capable of meeting the routine demands of the operation.
The chef/owner was fortunate in being able to recruit and retain two stable, dedicated,
and caring employees as servers for front-of-the-house operations. Much of the success of frontof-the-house performance is attributable to the dependability ofthese employees, their
knowledge and understanding of the restaurant, their respect and regard for the chef/owner, and
their commitment to customers and quality service. In many respects, these two employees
effectively share responsibilities of a front-of-the-house manager, inadvertently creating
opportunity for the chef/owner to devote inordinate attention to back-of-the-house operations.
Effort should be made to recruit, train, and retain at least one comparable supervisory
employee for back-of-the-house operations. This is unlikely to be accomplished at minimum
wage levels in the current market. Whereas profits appear sufficient to fund a position above
entry-level, this should become an immediate priority. The goal in creating this position would
be to bring backof-the-house operations to a level of independence similar to that enjoyed by the
front-of-the-house, thereby freeing the chef/owner to function in a broader capacity as general
manager. This would not only streamline kitchen operations but also make better use of the
chef/owner's time and ability.

Considerable time and effort is currently devoted to maintenance of multiple independent
(non-integrated) information systems that are never reconciled. It is recommended that the
general ledger, utilized for all accounting purpose, be acknowledged as the single, ultimate
source of financial information for the organization. Accordingly, appropriate resources should
be devoted to its timely and proper maintenance and all management reports derived from (or
reconciled to) the detail that supports its account totals.
Better use should be made of existing bookkeeping and accounting personnel. This
would not only free the chef/owner of many clerical duties that are currently neglected due to
time constraints, but would align responsibility for reporting with positions that best understand
the general ledger and the reports that are dependent upon it. As seen with the computation of
cost of food sold, correct methodology applied to incomplete or incorrect data is inadequate for
accurate management analysis and control.
It is recommended that the scope of services with the outside accountant be expanded to

provide a Statement of Profit and Loss on a monthly basis. These monthly statements should be
supplemented by a Balance Sheet and Statement of Profit and Loss, prepllred on an accrual basis
of accounting, at the end of each quarter.
Current bookkeeping staff should be requested to assume responsibility for maintenance
of sales histories, especially records of menu items sold. This should be a relatively easy Excel
spreadsheet project, readily maintained on a daily basis from information provided by the POS
system. Information from this spreadsheet should be used to determine weekly food production
quantities, which may be used to produce daily production schedules for staff. This would
organize the food production task and permit daily work assignments based on the production


schedule. It would also allow for the smooth flow of preparation and availability of product in
absence ofthe chef/owner.
Purchasing functions will likely improve with better scheduling of production and known
production quantities each week. The purchasing monitoring system currently in use should be
abandoned, however, as it is time consuming to maintain and the purpose it serves is better
satisfied by information from the general ledger. Any additional purchasing data bases should be
maintained by the bookkeeping staff as an extension ofthe accounts payable function.
Finally, it would be beneficial to reflect on existing attitudes and perceptions toward the
cadre of outside professionals available to assist the small business owner. There is no disgrace
in one person not being able to manage each detail of every aspect of a high-volume, dynamic
operation. This is why so many ancillary support services have evolved within the American
business environment and the foodservice industry, in particular. These resources can be highly
productive and cost effective when properly utilized and managed.

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Standardized Recipe Example

PRODUCT NAME: Butternut Squash Soup with

YIELD: 3-3/4 gallonsj 40 servings

Caramelized Apples

PORTION SIZE: 10 ~ OZ (1.1/4 cup)

Pan Size: 4118110" stock pot






French bread
Butter, unsalted




Onions, small dice


Leeks. small die

Carrots, small dice

1 1/2

Butternut squash, mad dice

Chicken stock




golden brown.


Pepper, white, ground

Allspice, ground

Ginger, ground


Apples, Granny Smith



Sugar, brown



Cream, heavy

Cut the bread into 1/2" cubes; fry in butter until


Sweat onions, leeks and carrots in butter.


Add the squash, stock and browned bread.

Simmer until vegetables are tender.


Puree the soup with an immersion blender.


Bring the soup back to a simmer; add salt

and spices.


Peel, core and thinly slice apples. Cook In

butter and brown sugar until apples are




At service, heat the cream and add to the soup.


For service, arrange apple slices in rose shape

in center of soup bowl; ladle hot soup around
apple decoration.



Cost Analysis Example

Recipe Title: Butternut Squash Soup with Caramelized Apples

Recipe Yleld:3-1/4 gallons

# of Port!ons:

Portion size: 10 ft oz (1-1.4 cups)

Portion Cost:








Bread, French baQuette

Butter, unsalted
Onions. yellow, Jumbo
Squash, buttemut
Chicken stock
Pepper, white, ground
AI1SDic8, ground
Ginger, ground
Apples, Granny Smith
Suoar, brown
Cream, heavy









5 gal